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How the New Mortgage Rules in Canada Will Affect the Real Estate Market

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Jamie Johnston, broker/owner of Remax Condos Plus and Andrew la Fleur discuss the new mortgage rules and how they will affect the real estate market in Canada. There will be some clear winners and losers under these new rules.

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Andrew la Fleur: What are the new mortgage rule changes and how will they affect the market in Canada? Well, in today’s episode, I talk to Jamie Johnston, broker/owner of RE/MAX Condos Plus to find out.
Announcer: Welcome to the True Condos Podcast with Andrew la Fleur. [inaudible 00:00:17] to get the truth on the Toronto condo market and condo investing in Toronto.
Andrew la Fleur: Okay, it’s my pleasure to welcome back to the show Jamie Johnston. Jamie is the broker of record, the owner of RE/MAX Condos Plus, the brokerage that I am part of. Jamie, welcome back to the show.
Jamie Johnston: Thanks very much, Andrew.
Andrew la Fleur: Jamie, you wrote a great article I was reading recently on the big changes that have happened in the mortgage rules in Canada that everybody’s talking about right now, so I thought I’d get you on here to give your take on it. You always have an interesting take on things. Why don’t we start, Jamie, if you can just fill everybody in, there’s really two main changes to the mortgage rules. Why don’t you just let us know, what are those two changes?
Jamie Johnston: Okay. Certainly, Andrew. The changes were announced on Monday by the Minister of Finance, and the first change related to the principle residence exemption, and they claim they’re closing a taxing poll that non-residents won’t be eligible this principle residence exemption. Background, [inaudible 00:01:29] to find the principle residence, and so non-residents just stepped up and claimed it.
My point to that was, how can a non-resident have a principle residence in Canada? It’s impossible. Anyway, they’re now officially closing it and eliminating, which never should have existed in the first place. Basically, it’s not going to have any impact on the market at all.
The second change that happened was that people have to qualify for the posted wait on a mortgage they’re going for. It used to be that if you took a term of five years or longer, you’d qualify at that rate, or if you took a mortgage less than five years, you had to qualify at the posted rate. That was only for high ratio mortgages.
Now, the government is saying that you have to qualify at the posted rate regardless of whether you take a five year mortgage or something shorter, and secondly, all mortgages that are ensured through the government and CNHI, both high ratio and non-conventional mortgages have to be qualified under the posted rate as well.
Andrew la Fleur: Right. As of the time of this recording, what’s the difference between the posted rate and the actual rates people are getting?
Jamie Johnston: Well, the posted rate right now is the average rate of what the posted rates of the big six banks are, and they’re taking 4.54%. What you can get a five year mortgage for today is, and you’re more astute than I am in this, Andrew, but it’s somewhere in the neighborhood of about 2.5%. I think the example that the government used is that someone who has a down payment of $40,000 makes $100,000 a year used to qualify for up to $665,000 in mortgage, and now they’ll only be able to qualify for $505,000. It’s certainly lower in the price range about what people can afford.
Andrew la Fleur: Right. You’re seeing basically anybody who’s putting less than 20% down, which is a lot of the first timers especially, they’re looking at their purchasing power just been dropped by 20 or so, 20, 25%.
Jamie Johnston: In terms of price, absolutely, certainly for first time buyers, but the other point I want to make is that people who go for a conventional mortgage may also be impacted depending on where they go to get a mortgage. For example, I know your people know what monoline lenders are. They are companies that just do mortgages. I guess the biggest one is First National, but there’s others, too. They insure all their mortgages, whether they’re high ratio or conventional. They’ve always done it. They don’t charge the insurance rate back to buyers who were taking conventional mortgages with them, but they were insuring them, and they built that into their prospect funds. All those people will have to qualify under the posted rate as well, too.
As a backdrop, I’ve looked at what’s the mix of high ratio to conventional mortgages. High ratio mortgages in today’s market is about 25 to 30% of the market, so conventionals are about 70 to 75% of the market. Some of the conventional mortgages are insured through the monoline lenders, and a small amount is insured with the banks, and the rest of the conventional mortgages aren’t insured through the government. It depends on where you go, whether you’re going to be tested for the posted rate or the actual rate, because the government can’t legislate stuff that they’re not insuring.
Andrew la Fleur: Right, so the non-bank lenders, the monoline lenders, which are the lenders that mortgage, a lot of mortgage brokers will be using these lenders, as opposed to if you go to one of the big five banks. They’re not liking these rules, are they? Does the mortgage brokering, the monoline industry, have any recourse do you think to this? Is there anything that can be done? They’re probably very upset right now, I would imagine.
Jamie Johnston: I just think the group for the banks is a little bit stronger than for the monoline lenders, and that usually happens when policy comes out [inaudible 00:07:00] and lobby the best gets the most favorable treatment.
Andrew la Fleur: Right. In terms of implications, how is this going to play out in the market? What do you think the key implications are for real estate in Canada?
Jamie Johnston: The government is hoping because buyers can afford less that property prices will drop to compensate these buyers and the buyers will be able to buy the same properties as they always bought. I think that not only is a stretch, that won’t happen. The only time when real estate prices really drop significantly is when sellers have to sell at any price.
You and I both know, Andrew, that sellers list their property for sale. If they don’t get their price, they just take it off the market. They don’t just keep dropping their price until they sell it, so there’s very few people that will be forced to sell, so I don’t see property prices dropping at all.
What I do see is that buyers, and particularly first-time buyers, are going to have to lower their sights in terms of what they can afford. What does that mean? I think more and more people are going to have to settle for condos, and I think they’re going to start buying smaller and cheaper condos as well, especially the first-time buyers. I think that’s an important implication in the market.
I think for the higher priced properties, instead of [inaudible 00:08:42] as you well know, Andrew, in approximately 30 to 45 days, even for million dollar plus properties, I think owners now are going to have to be realistic and expect to take 90 days to sell those types of properties. I see that as a big implication the market.
What is the good news? There is some good news from these changes, and I think the good news really is for investors. One, there’s going to be more and more people forced into renting and never buying, and that will just increase the demand for rental properties, which will raise rental rates, so investors all like that.
Secondly, I think the demand for small units will only intensify, not only for renters, but from people who thought they were going to buy a $500,000 or $600,000 condo, now they can only afford $400,000, so all these things are going to trickle down to the fact that I think lower priced properties and particularly condos will remain resilient and will become increasingly popular.
Andrew la Fleur: Do you find it kind of ironic that the government is trying to, I suppose, help people, but the people that this is going to hurt the most are the people at the low end of the market, as you mentioned, the first time buyers, the people who are just on the edge of being able to afford something, and now the government has essentially come along and chopped them down a couple of notches. Like you said, for some people that means instead of buying a house, they’re buying a condo, or instead of buying a two bedroom condo, they’re buying a one bedroom condo, or instead of buying at all, they are going to continue to rent. What do you think about that?
Jamie Johnston: Exactly. You’re right on, Andrew. Here’s what’s happening. The government is addressing rising prices, and prices in Toronto are rising, especially for low rise detached housing, and I would say bubble like increases. What they’ve done is they’ve tried to address the problem of these rising prices on the demand side by eliminating buyers. The real solution, the governments don’t seem to want to tackle that because it’s a lot of hard work, and it’ll take a little longer, is they need to solve the housing issue on the supply side. Prices are a reflection of demand and supply in every market, and you just don’t have enough supply.
You can look to all the screw ups that governments have made over the years, from the land belt policy, the green belt, which limited the supply of housing for low rise housing. They tried to have intensification in terms of condos, but if you look at the process of how long it takes to get zoning approval, what the development charges are and everything else, government’s, again, done a great job of increasing the price of this type of housing, and made the delays in delivering this type of housing so lengthy that they forced up the prices. Governments need to sit down and solve the supply issue. The final thing they need to do on the supply side is they need to invest a little more in public transportation than they have.
Andrew la Fleur: Absolutely. We’re in Toronto. Obviously, we’re most interested in Toronto. Do you think that these rules, these changes, will affect the core of the city versus the rest of the country differently? I think that here in the city, we will feel it a lot less. We’re not really thinking about it here in the city as much, but everybody else in the rest of the country, smaller towns, smaller cities, especially the first-time buyers in those sorts of places that there’s just a lot less capital, a lot less money flowing.
Jamie Johnston: Don’t forget, incomes in smaller communities are a lot less than they are in downtown Toronto, as well. You look at the price of businesses that are in downtown Toronto, whether it’s banking, investment, accounting firms, high tech, the movie industry, all these types of industries are pretty [inaudible 00:13:29]. You go out in the small town Ontario or Canada, and people are working at $20, $25, $30 an hour, which is something totally different. I think it will impact them as well, too.
As I said, in Toronto, I would say for all markets, my final point on that is that all markets have uncertainty. We have uncertainty right now with these new changes, because everybody including myself and yourself has tried to guess what the impact will be. We can only guess. We can logically work through it, but at the end of the day, it is a guess. When these things happen, I’m sure buyers are thinking, “Wow, they’re telling me prices are going to fall, so let’s wait and see if they do.”
They aren’t going to fall, but there’s going to be a definite pause in this market, and that’s another opportunity for a lot of buyers with the pause. When they see most buyers [inaudible 00:14:37], the buyers that hang in there are going to have a much better selection, and they certainly won’t be in the [inaudible 00:14:44] scenario. The final thing I see is a pause in this market, and I’d have to say after the announcement, it’s going to be 30 to 90 days where there will be a definite slowdown. Bureaucrats are changing, they’re working.
Andrew la Fleur: And then the spring market will come next spring and we’ll be back to normal.
Jamie Johnston: I guess my final point on that is analyzing sales in Toronto, we’re going to have about 115 to 120,000 sales on the Toronto real estate board this year. I think there’s some profit in those numbers. I even analyzed what sales to population should be over about 15 to 20 years. For the size of our populations today, we should be running about 100,000 sales a year, which would be a normal market. I first [inaudible 00:15:47] next year. That’s what I think we’re going to be interested in is about 100,000 sales next year.
Andrew la Fleur: Right.
Jamie Johnston: I think we’ll have a slow start to the year, and I think it was 2015, remember how it was really, really cold, and we had a very slow start to that year, and it turned out fine at the end, and I think that’s what’s going to happen in 2017. There will definitely be a pause in the market while everybody tries to figure out what these changes mean, but I would say this change, certainly having to qualify at the posted rate, is a far bigger impact than any of the other changes that the government’s come up with.
Andrew la Fleur: Right. No doubt about that. Jamie, thank you very much for your time today. Appreciate your insights into this.
Jamie Johnston: It was a pleasure as always, Andrew. I always love talking to you.
Andrew la Fleur: Great. Thanks a lot, Jamie. We’ll talk to you soon.
Jamie Johnston: Thanks so much. You bet.
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